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Sunday, 12 September 2010

Can't Pay, Won't Pay.

Alternatives to Cutting.

The cuts are almost upon us and will be delivered unto us by the Oik, otherwise known as George Osborne, from the dispatch box. The media have been loyally spouting the party-line of "Cuts! Cuts! Cuts!" and have even gone as far as putting together "debates". In such "debates" the public has a role of discussing where the incisions should be made, prominent economists and politicians participate to make sure the discussion does not drift too far off the party-line. Consequently, Ken Livingstone was scoffed at for mentioning that the current debt is equal to a third of the debt Britain had accumulated during the war against fascism. Even though it's true, today Britain's debt adds up to about 70% of GDP and after WW2 the debt made up over 260% of GDP. In the years following, there was no austerity, we founded the welfare state and nationalised major industries.

The problem with cuts is that it could increase the deficit, since it could increase unemployment and by extension lower tax-revenue whilst causing benefits to rise. In a nutshell, if the government cuts the job of an employee earning £25,000 it would only save the Treasury about £2,000 a year as the rest would go on benefits and be lost in tax-revenue. So if the government fired say 10,000 people earning £25K a year, costing £250 million to employ every year, it would only save £20 million if that. At the same time this could lead to a wave of redundancies in the private sector. This would go a long way from cutting down the "fiscal gap" of £170 billion. In fact, if we wanted to pay off the deficit we would have to fire 85 million people earning 25K a year. The word austerity is a euphemism, stupidity is more befitting.

Luckily, it is not as Thatcher used to say "There is no alternative." This kind of defence is the short-term kind, a method of shooting down opponents to the economic agenda. Similarly Ken Livingstone was derided for raising facts which conflict with the aims of the Con-Dem Coalition. It should be noted that from 1920 to 1960 the debt never fell below 100% of GDP. It is only in recent years that it has become an expectation that we have less debt less than 60% of GDP. This standard was set during the Thatcherite years, of massive spending cuts and regressive taxes, when John Major signed the Maastricht Treaty. The huge budget deficit is down to the sharp drop in tax-revenues during the recession. As a result, the level of public spending which had been increasingly steadily with tax-revenues until 2008 became unsustainable. Public spending is not a problem, taxation is.

The current tax system is losing an estimated £100 billion a year in tax-revenue due to evasion and various loopholes in the system. The rate of public spending is partly what has been driving economic growth for decades. It should be noted that during the social democratic era, which began in 1945 and ended in 1975, public spending and taxation was far higher on the rich than it is today. Throughout that period Britain was the subject of greater economic growth, higher productivity and a level of employment higher than anything seen since 1979. Wages also had a tendency to increase with productivity and reached a peak in 1967, when the workers' share of GDP was at its highest, because there was a strong labour movement in the UK. So we should not be aiming to cut public spending, instead we should be looking to increase taxes along fairer lines.

If we want higher and fairer taxes, where do we start? Well 10% of the British population own £4 trillion, with an average of £4 million per household, and the total personal wealth of the UK is £9 trillion, the bottom half of the populace owns less than 9% of such wealth. The richest 10% hold the bulk of the wealth in the form of property and pensions, as well as paintings and antiques etc. Greg Philo proposes a one-off 20% tax of this group, it would rake in around £800 billion and would hold the richest people in Britain accountable for their role in the financial crisis. The tax could be paid at a low rate of interest over a number of years, like student loan repayments really. If they wish they could make it a charge on their property when they die. Of course, this might be extreme to some so let's survey other options.

A crackdown on tax evasion and closing of loopholes in the tax system could save around £50 billion to £100 billion a year. Raising the rate of income tax on those earning over £100,000 a year to 50% would raise £2.3 billion. £15 billion more could be raised by blocking high earners, those earning more than £100,000 a year, from claiming more than £5,000 a year in tax relief. An empty property tax could raise £5 billion a year and replacing VAT with a progressive "bank debit tax" could deliver over £4 billion to the Treasury a year. Removing the cap on national insurance contributions, extending national insurance to investment income, would raise £10 billion a year. It's estimated that the 'Robin Hood Tax' could yield £20 billion a year. And these are only a few suggestions, there are many others out there. There is never no alternative.

Taxation is not the only area in need of change, the entire economy needs change. The financialisation of the economy since 1979 has led to a decline in the manufacturing sector share of GDP, falling from 20% in 1997 to 12% in 2007, whilst the financial services share of GDP has risen from 5% in 1995 to 7% in 2007. Meanwhile employment in manufacturing has fallen by around 75% over the last 30 years, a 30% fall from 1979 to 1990 alone. For the long-term future we need to consider ways of reversing this process of financialisation, implementing tight regulations and capital controls. So that we can start thinking about greater economic stability, higher rates of employment and productivity. This is not just a call to return to the social democratic era that began in the 1940s - which gave us such wonders as universal health-care. As it is possible to go even further down this road in pursuit of greater equality and freedom for ordinary people.

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